Friday, March 30, 2007

Sheikh Saleh Kamel, the head of Al Baraka Banking Group, says that a $100 billion Islamic mega-bank is possible in 5 to 7 years. The bank which will be called Emaar, will be established in Bahrain and start with $1 billion and reach $100 billion in 5 years. Sheikh Kamel believes the bank will increase liquidity in Islamic banking.

Thursday, March 29, 2007

Economic Secretary for HM Treasury Ed Balls opened the London Islamic Financial Services Summit with a speech detailing how the U.K. government has adjusted its tax and regulatory system in order to make Shari'ah-compliant products competitive in a tax sense with conventional products. Mr. Balls noted that:

"Increased availability of these types of financial products is vital to ensuring the Muslim community in Britain has equal access to business opportunities. Banks such as Lloyds TSB, Royal Bank of Scotland, and HSBC are all offering Shariah compliant products, and London is also the home to a fully Shariah compliant retail bank. Since 2003 the Islamic mortgage market has grown to over half a billion pounds - an increase of about 50% in the last year alone."

He describes how one of the focuses has been on reforming tax law for sukuk to give them the same tax advantages as corporate bonds and securitizations. He also announced a meeting at No. 11 Downing Street (the official residence of the Chancellor of the Exchequer, Gordon Brown) with the experts of Islamic finance.

Following up on the press release, Prof. Christophe N. Bredillet, Dean of Postgraduate Programs at ESC-Lille who answered a few questions regarding their announcement of plans to open a campus in the Gulf region:

IHI: Will the Gulf campus offer courses in Islamic finance, banking, investment or management?Prof. Bredillet: Yes, but this will become a topic in our MBA programme located in Paris as wellIHI: If it offers Islamic finance courses, will it exploit the opportunities to work with Islamic financial institutions in the Gulf?Prof. Bredillet: Yes of course. And as we are currently offering certifications like CIMA [The Chartered Institute of Management Accountants] and CFA [Chartered Financial Analyst] in France, we think that we will have a good opportunity to use this as a lever.

The press release is below:

Leading French business school ESC Lille to open campus in Gulf RegionUnited Arab Emirates, Bahrain, Qatar under consideration

March 2007. Leading French business school Lille School of Management (ESC Lille) has announced plans to open a new campus in the Gulf Region. The school is currently considering The United Arab Emirates, Bahrain or Qatar as possible locations for the campus, which it hopes to launch within the next two years. ESC Lille is keen to promote its expertise, notably in international project management, in the Gulf’s vibrant and growing education market as well as to increase recruitment and extend its partnerships in the region.

For over a decade, ESC Lille has welcomed students and executives from the Gulf Region, many of whom are attracted by the school’s expertise in project management. ESC Lille is the first institution outside the US to have its postgraduate project management programmes accredited by the Project Management Institute (PMI Global Accreditation Center for Project Management) which counts 230 000 members in 125 countries worldwide. The school has further reinforced its presence in the Gulf through partnerships with some of the region’s leading international companies including Thales, Dassault and Total; and local companies Deyaar Development, Union Tower, UAE Airforce, Ideal Management Consulting, and Aramex, among others.

“Through its students, alumni, and partners, ESC Lille has built a relationship with the Gulf Region that goes back 15 years,” explained Christophe Bredillet, ESC Lille’s Dean of Postgraduate Programmes. “The economies of the Gulf are booming, international investment is on the rise, and education is a top priority. A campus is the next logical step.”

Representatives from ESC Lille will be on hand to speak to prospective students at the Global Education and Training Exhibition (GETEX) in Dubai from April 11th – 14th, 2007.

Experts in Islamic finance believe that, contrary to expectations, the rapidly growing Islamic finance market has not created many new entrepreneurs, instead creating greater wealth for bankers and lawyers and has served the already-banked market. Creating shari'ah-compliant microfinancing will allow banking services to become more widely available, but this has not been developed. One of the Institute's priorities is creating a model for halal microfinance that will be as successful as conventional microfinance but using an equity-based rather than a debt-based model.

There is a comment in the Business Times (Malaysia) advocating for development of parallel Islamic capital markets which operate along side conventional capital markets.

GCC and Asia

Dr. Zeti Akhtar Aziz, governor at Bank Negara Malaysia, the Malaysian central bank, highlighted the growing links between the Gulf Cooperation Council and Asia which has been reinforced by the growth of Islamic finance.

CIMB Group CEO Nazir Razak believes the Islamic financial system has significant leakage into non-Shari'ah-compliant assets. He was speaking at the Global Islamic Finance Forum in Kuala Lumpur, Malaysia. He was critical of the usage of proceeds from investment of deposits in commodity murabaha and the overpricing of sukuk in the Middle East when cheaper sukuk financing is available in Malaysia. The Malaysian Islamic interbank money market announced a new commodity murabaha product for liquidity management yesterday.

Tuesday, March 27, 2007

There is an article (sub. rqd.) in the Wall Street Journal (an also a freely available press release from Shari'ah Capital) about the launch. The new products will be based on al-arboon, an advance payment similar to a down payment towards the purchase price that gives the buyer the right to purchase a good at a given price. GRT Capital Partners, an alternative investment manager in Boston, will use the platform. Al-arboon is an alternative to the more controversial salam (forward) method of replicating options and shorts.

Islamic finance lacks depth

While Islamic finance has grown rapidly and continues to grow, it has not developed the depth of conventional financial markets, Reuters reports. Much of the growth has been in sukuk and private equity, as well as other financial services for high net worth individuals yet the secondary market for sukuk is almost non-existent. One of the most interesting parts of the article is the comment from the head of Arcapita, the Bahraini Islamic private equity firm which owns Church's Chicken, Caribou Coffee and Yakima in the U.S., suggesting that Islamic finance has been successfully marketed in the U.S. based on its similarities with ethical investing.

The head of International Centre for Education in Islamic Finance (INCEIF), Professor Dr. Malik Muhammad Mahmud Al-Awan believes that countries should cooperate in research on new Islamic financial products. This approach should take a non-confrontational approach to conventional finance, as Malaysia has done, in order to spur the acceptance of Islamic finance. He stressed that "the 21st century is seeing so much political conflict between Islam and the West, yet in the field of Islamic finance, the West has embraced it with open arms".

Minority shareholders of Rashid Hussain Bhd (RHB) want it to remain listed. Employees Provident Fund, the Malaysian state-run pension fund which will control RHB has said it will delist RHB but RHB Capital will remain listed.

The Annual Report describes the significant development in the Islamic Interbank Money Market program:

"A major development in Islamic money market operations during the year was the inaugural issuance of the Bank Negara Malaysia Sukuk Ijarah on 16 February 2006, with an issue size of RM400 million."

The ijara sukuk is based on the transfer of Bank Negara Malaysia (BNM) assets (buildings and land) to a Special Purpose Vehicle (SPV) which purchases the assets with cash from sukuk issue and then leases the assets back to BNM and distributes the leasing income to the sukuk holders. At the maturity date of the sukuk, BNM repurchases the assets at a prespecified price. The sukuk will be used as part of the BNM liquidity management purposes in the Islamic Interbank Money Market.

The Financial Stability report describes the Islamic banking sector as well capitalized, in part because of higher pre-tax profits, and presents a pre-tax preliminary (unaudited) profit growth rate for the Islamic banking system of 9.6% over 2005. Takaful operaters also saw contributions and assets rise. Malaysia saw the growth of new Islamic banks, the conversion of some Islamic windows into Islamic banking subsidiaries and the licensing of two retakaful (Islamic reinsurance) firms. The Islamic financial industry saw increasing adoption of the Capital Adequacy Standards from the Islamic Financial Services Board (IFSB) and the launch of the Malaysian International Islamic Finance Center (MIFC).

The State Bank of Pakistan, Pakistan's central bank, has issued new qualifications and restrictions on Shari'ah advisors. The new regulations require Shari'ah advisors to have a postgraduate degree in Shari'ah law, four years of experience and limits the degree to which Shari'ah scholars can hold executive or non-executive positions with Islamic banks other than Shari'ah scholars. The new regulations do allow Shari'ah scholars to oversee multiple Islamic financial institutions as long as they are not involved outside of the Shari'ah compliance role and do not have significant financial interests in any organization to which they provide oversight.

Kuwait Finance House, the Kuwaiti Islamic bank which was involved in the bidding for Rashid Hussain Bhd (RHB)before the Employees Provident Fund (EPF) entered with the winning bid, wants to gain a 49 percent stake in RHB Islamic, the Islamic banking arm of RHB. Managing Director Salman Younis said no offer had yet been made, but that KFH was eager to obtain a stake in RHB Islamic Bank. In a panel discussion, Mr. Younis remarked that deputy governor of Bank Negara Malaysia, the Malaysian central bank, "would like someone to take up the 49 per cent equity in RHB Islamic. I [Mr. Younis] didn’t say anything. If we have been offered the opportunity... yes [we would have taken it], because you know we wanted to get RHB".

UK has done enough to encourage Islamic finance

The director of KPMG Islamic Finance Advisory Darshan Bijur says that Gordon Brown, UK Chancellor of the Exchequer and likely successor to Tony Blair as Prime Minister, has done enough to adapt British laws to encourage the growth of Islamic finance in the country.

Tuesday, March 20, 2007

Morocco's central bank, Bank Al-Maghrib, will allow ijara, musharaka and murabaha products to be offered by banks in Morocco. A statement released by the Central Bank said Islamic finance will "allow a widening of banking services and contribute to a higher rate of banking in the economy"

The State Bank of Pakistan has also issued licenses to four microfinancing institutions, although they are not mentioned as being Shari'ah compliant. The state-run microfinance institution Khushalibank does not indicate on its website that it is Shari'ah compliant, so my assumption is that it is not.

At the unveiling of CIMB's Imtiyaz Liquidity Fund in Brunei, the Minister of Finance announced that the government is working to promote a domestic Islamic capital market.

IT important for Islamic funds

Managed funds tech company Charles River believes that technology plays an important role in Islamic finance and particularly Islamic funds because it can allow quick screening of companies for Shari'ah-compliance.

Thursday, March 15, 2007

Employees Provident Fund, the Malaysian state-run pension fund which agreed to purchase Utama Banking Group's 32.8 percent stake of Rashid Hussain Bhd, announced it will reduce the company's debts, in part by selling buildings and reducing the size of RHB and delisting its shares. RHB Capital, of which RHB owns 65 percent, will remain listed. EPF also announced it is considering choosing Kuwait Finance House (KFH) as its strategic partner to manage RHB Capital. Azlan Zainol, chief executive of EPF, told Bernama that "I think [KFH will be a good partner]. It will augur well in helping Malaysia [become] an Islamic Finance Hub".

Wednesday, March 14, 2007

London Asia Capital plc, a British merchant banking group, is opening an Islamic finance division in Xinjiang, China in partnership with Xinjiang Investment Corp. The Xinjiang region is home to most of China's estimated 20 million Muslims. The Islamic finance division will offer credit guarantee services to Islamic and Shari'ah-compliant companies.

Lloyd's of London 'very interested' in takaful

Lloyd's of London, the U.K.-based insurance company, expressed continued interest in expanding to serve the takaful markets in the Middle East and Malaysia. Chairman Peter Levene said he believed that takaful "could be a much more acceptable way for individuals and corporations in that area to take out insurance, which they have been unable or unwilling to do in the past" and said Lloyds was "very interested" in entering takaful markets. In a press release from Lloyds on March 1st, Peter Levene expressed that Lloyds believed "there are some potentially strong business opportunities in the Retakaful [Islamic reinsurance] sector and that Lloyd's could become an attractive platform for capital providers wishing to invest in this area."

Tuesday, March 13, 2007

The collateral management services manager Jeyaharan Thurairatnarasah of C&P Asia Sdn Bhd said Islamic banks in Malaysia can use warehouse receipt finance. "Jeyaharan said Islamic banks can introduce warehouse receipt financing as commodity finance is possible within Islamic banking structures and is not against syariah principle." Warehouse receipt finance is valuable for companies with large commodity inventories. The firm pledges the warehoused commodities as collateral for the loan.

Monday, March 12, 2007

Malaysian state-run pension fund, Employees Provident Fund (EPF), will sell around 35 percent of RHB Capital but will keep its holdings in Rashid Hussain Bhd. The chief executive of the EPF Azlan Zainol, said 'hopefully' the EPF can work together with Kuwait Finance House (KFH) although 'for the time being', the EPF did not plan to sell a stake of RHB Capital to KFH. The managing director of KFH, Salman Younis, said they want to have equity participation in RHB Capital "should the EPF see synergies in partnering with KFH".

Anwar Ibrahim to speak at the Dubai IIFF

Former deputy prime minister of Malaysia, Anwar Ibrahim, will speak at the International Islamic Finance Forum (IIFF) Dubai 2007 on expanding the process of assessing Shari'ah-compliance to include equity and distributive justice of Islamic financial products. The conference will be held April 2-5, 2007 in Dubai and is listed on the IHI conference listings.

Friday, March 09, 2007

The Malaysian state run pension fund, Employers Provident Fund (EPF), announced that it will not manage Rashid Hussain Bhd, in which it agreed to purchase a 32.8% stake from Utama Banking Group. The CEO of EPF, Datuk Azlan Zainol, announced that the EPF wants to leave the management of the company "to professional directors and professional management to oversee the running of the bank". This statement, along with the enthusiastic response by Kuwait Finance House suggest that Kuwait Finance House may be involved in managing the bank and the EPF may support KFH's desire to turn RHB into a mega Islamic bank.

Another article in the Business Times (Malaysia) described the problem EPF faces in finding enough assets to purchase with the funds it manages. It is prohibitted from investing outside Malaysia and the supply of government bonds has fallen as the government tries to balance the budget.

Indian Islamic equity

There continues to be a lot of debate about how to determine acceptable financial products for Muslims in India where there are only two Islamic financial services companies in the company and no Islamic banks.

Thursday, March 08, 2007

One of the first things that I like about this article is that it provides a much more nuanced (and accurate, I think) description of riba and almost more importantly, the reasons for its prohibition. It seems to me that too many stories written about Islamic finance describe riba as 'interest' and gharar as 'risk' without explaining in more detail the nuances and the reasons for prohibition.

"Riba [...] is not necessarily about interest rates as such, but rather about unlawful, unequal gain [and[ the prohibition against riba is related to ethical norms and the establishment of a moral economy [...] The key concept to grasp when it comes to understanding the idea of the prohibition of riba, is that it is not acceptable for payment to be guaranteed regardless of the outcome for which the money was originally borrowed."

The rest of the report provides a brief description (and clear chart of a sukuk transaction) for ijara, mudaraba and musharaka sukuk.

As the earlier article describes, Fitch's views sukuk as asset-based securities equivalent in risk to senior unsecured obligations. One of the interesting and illuminating descriptions of Islamic finance and sukuk in particular describes how

"Fitch would tend to view Sukuk as similar to other 'ethical' bonds - such as those designed to comply with the needs and desires of environmental or other socially conscientious investors".

This is a good analogy since the few court cases by companies trying to eliminate their debt by claiming the sukuk were not Shari'ah-compliant have not had their claim supported by the courts. These cases are the first few and the degree to which Shari'ah-compliance is legally enforceable through the contract.

Malaysian state pension fund, Employees Provident Fund (EPF), increased its offer for Utama Banking Group's 32.8% stake in Rashid Hussain Bhd (RHB) and will purchase also purchase the remaining shares of RHB and RHB Capital. The announcement was welcomed by Kuwait Finance House, which had also been competing for Utama's stake in RHB. The deal for EPF to purchase Utama's stake ends EON Capital's attempt to take over RHB. Statements from KFH suggest that the agreement will allow KFH to invest $4 billion in RHB and turn it into a large Islamic bank.

Wednesday, March 07, 2007

A new website was recently launched offering information about Islamic financial products in the U.K. The site, IslamicMortgages.co.uk. The site will offer specific information about different products (and advertising of these products) starting in July 2007. Currently the site is primarily a library of basic information about Islamic finance.

In a sign that the bidding war over Rashid Hussain Bhd could last much longer than it has already, EON Capital announced it was increasing its offer for RHB and RHB Capital. This announcement follows news yesterday that Employers Provident Fund, which owns 31 percent of RHB, entered the bidding for Utama Banking Group's 32.8 stake in RHB. The other company involved in the bidding is Kuwait Finance House which has made a bid for the Utama stake in RHB.

One of the first things to strike me in this article is the skepticism of Fitch Ratings towards sukuk being asset-based, secured borrowing. "Depending on the precise structure of the bond, the rating may be linked to the rating of the originator of the transaction or to the underlying assets if the bond satisfies the agency’s requirements for a true securitisation." It appears that the way Fitch's approaches the ratings process is to use the originator's rating as a default (or possibly lower if the originators have more preferential creditors than the sukuk holders) unless the originator demonstrates that the sukuk is a "true securitisation". Fitch's defines true securitization by laying down why most sukuk are not securitized:

"Unlike a true securitisation, the investors do not have any recourse to the underlying assets in the event of default. Default accelerates the purchase undertaking, which, if not fulfilled, would trigger a claim by the investors against the originator. This would be immediately due and payable, and would be pursued through the commercial courts. The assets within the Sukuk would be available for all senior unsecured credits of the originator, and the investors would ordinarily rank as senior unsecured creditors of the originator. They would rank pari passu with other senior unsecured creditors, except for any preferential creditors as determined by local law."

In the event of a default, sukuk holders would not have any higher claim on the assets backing the sukuk than other unsecured creditors and therefore the sukuk does not display the asset-based nature it claims. In some instances, the payments stream may not fluctuate, "The originator may provide a liquidity facility to match receipts to the contractual periodic distributions and eliminate any volitility in the cash flows deriving from the asset".

Even the ratings methodology, which bases sukuk ratings on the originator rating in most cases (treating the sukuk as a form of unsecured lending and not an asset-based certificate based on risk sharing) does not fully address potentially hidden risks involving the sukuk's Shari'ah-compliance.

At the end of the article, Fitch describes what sukuk lack that keep them from being classified as securitized directly (they have never reviewed a sukuk transaction that would meet these criteria: "In order to achieve a real securitisation, the transaction should [...] represent a true sale, ie the underlying collateral has been validly transferred to the SPV [...] In the event of the insolvency of the originator [...] the underlying collateral must remain completely separate from the assets of the originator/parent company [and sukuk] investors should have first priority over the underlying collateral."

The lack of sukuk issues meeting Fitch's requirements for securitization presents a difficulty for the sukuk markets, who claim that the product they trade is asset-based. Without meeting the criteria set down by Fitch's (or other similar criteria), sukuk are not asset-based in a meaningful, legally-enforceable way nor are most sukuk truly based on risk sharing between the originator and the investors.

Monday, March 05, 2007

Fitch Ratings, which has an office in Dubai, believes the ratings issues are similar between Islamic banking & sukuk, although there are significant differences in some risks. Mark Young, Managing Director of Fitch Financial Institutions in London said this could involve "closer analysis of each bank's risk management processes, funding and liquidity position, legal issues, regulatory oversight, transparency, accounting standards and corporate governance practices."

I will review these documents and provide a more detailed summary later in the day.

Islamic banking sees significant growth-Kuwaiti Central Bank governor

The Governor of the Central Bank of Kuwait, Sheikh Salem Abdulaziz Al-Sabah, believes that Islamic banking is on the cusp of significant growth, having captured 26 percent of the market within Kuwait. He was speaking at the International Conference for Islamic Finance & Investment.

Dubai Bank offers 'Sanad' product

Dubai Bank announced the launch of its 'Sanad' product, which will "meet [customers'] diverse personal finance needs" and allow them to move outstanding liabilities with other banks into a Shari'ah-compliant debt program.

MIFC to license International Islamic Banks and extend full tax exemption for 10 years

The International Islamic Banks will be able to offer foreign-currency denominated products under a Malaysian International Financial Centre (MIFC) initiative where Islamic financial instutions set up an "International Currency Business Unit", which is fully exempt from taxation for 10 years. Foreign banks are being invited to open Islamic banks within the country in moves designed to solidify Malaysia's role as an Islamic finance hub.

Thursday, March 01, 2007

Although I have already mentioned that Cass Business school will offer classes in Islamic finance, I wanted to link to an article on CNN.com. I was encouraged to see recognition that "Muslims also believe that investing should be socially responsible." The recognition that Islamic finance and investing is at its heart a type of ethical investing will increase its appeal among Muslims and also provide an easy way to draw non-Muslims into the industry.

Islamic finance in Botswana

The First National Bank of Botswana (FNBB) announced it will offer Shari'ah-compliant products in addition to its conventional banking products. According to the article, 15,000-20,000 Muslims live in Botswana out of a total population of 1.6 million, although other estimates of the Muslim population range from 3,000 to 75,000.

Have I missed a development in Islamic finance you think is important? Let me know by emailing me at blake@sharingrisk.org.

DISLAIMER:

The opinions expressed on this blog are mine alone, and do not represent the opinions of any institution with which I am affiliated. The opinions expressed should not be taken as a recommendation or offer to buy or sell any securities, nor is it personalized investment advice. This blog has been derived from information considered reliable, but I do not guaranteed its accuracy or completeness. Any links are for informational purposes only and they have not been reviewed for accuracy.